Challenging Times for the Big 3 Drug Wholesalers

Challenging Times for the Big 3 Drug Wholesalers

The Big 3 drug wholesalers in the U.S.–AmerisourceBergen, McKesson and Cardinal Health–are continuing to navigate stiff headwinds both old and new. Handling more than 90 percent of the drugs across America, the wholesalers are needing to realize additional cost savings which have caused investors to continue to question their growth prospects given persistent low visibility into earnings.

Concerns persist around the longer-term effects of generic deflation, branded drug pricing uncertainties, and vertical integration as follows:

  • Generic deflation: Fifteen of the top twenty generic companies reported declining Year over Year revenue. This decrease in sales is a result of consolidated buying power with only three buyers controlling almost 90% share of purchases. The retail pharmacy industry has been putting pressure on wholesalers due to declining reimbursements, escalating Pharmacy Benefits Managers (PBM) fees, and a proliferation of access issues related to drugs and patients. Furthermore, deflationary prices are affecting wholesaler gross margins due to the fact the FDA has been quick in approving new medications, yet multiple generic competitors within specific drug classes still exist. Lastly, Group Purchasing Organizations (GPOs) are beginning to gain more and more traction by putting more effective pricing pressure on generic companies, which in turn affects the wholesalers.
  • Branded drug pricing uncertainties: Traditionally, wholesalers have made their money off of brand inflation, yet because approvals of generics have increased, heightened competition has been created and therefore less money to be made off of brands. With Secretary of Health & Human Services Alex Azar recently talking about his vision for no price increases or price decreases of branded products, branded inflation is also becoming a key uncertainty. There is likewise an issue around wholesalers being affected by pharmaceutical company rebates because no assessments for significant price increases have been planned for 2018.
  • Vertical integration is also creating a huge headwind for the wholesalers today. As the size of customers increases, wholesaler profits decrease proportionally.

Market models

Ideally, wholesalers are interested in keeping the existing model of drug distribution intact, with their focus on making discounts on the list price. Purchasers, however, would like to see a more transparent model whereby discounts are placed on the net price (after all the rebates are put into place), rather than the list price.

We are seeing signs of change, however, with wholesalers beginning to treat specialty pharmacy as a different cost of business for example. Specialty drugs remains a growth market, though with less profit. Because wholesalers do not receive the same distribution service allowance as for small molecule drugs, they will likely be extremely resistant therefore to providing the same cost of goods discount as for small molecule products.

Looking forward, it is yet to be seen if retail pharmacy and GPOs will start to bypass PBMs and distributors by purchasing inventory directly from a manufacturer. One untested variable is the potential move by Amazon to eliminate the role of the middleman. PBMs, however, will most likely maintain their position of control because PBM-owned pharmacies with mail order and specialty drugs still remain the largest customers for wholesalers.

Controlling patient lives

Ultimately, the industry is waiting for Amazon to figure out their approach within the pharmaceutical industry and adapt accordingly. One thing experts do expect to see a lot more of is vertical integration because of the market’s interest in controlling patient lives and quest to drive patients into stores.

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